Where will economic growth come from?

The global economic system demands exponential growth to survive rather like a bicycle which falls over if forward momentum ceases. It is underpinned by the interest based money system which demands expanding debt to provide sufficient money to pay the interest on pre-existing debt.

Growth in the US, UK and other countries has, for the last 30 years, depended on rising house prices – real wages have stagnated and the shortfall in spending power has been bridged with credit backed by rising house prices and government handouts to make up for inadequate earnings. Hence the concentration on house prices as a barometer of economic activity. But all is not well in the world of real estate as recent data from the Economist shows:

Our latest round-up shows that many housing markets are still in the dumps

“THE house-price boom that preceded the financial crisis was remarkable for its scope and scale. With a very few exceptions, there seemed only one way for prices to go: up. Things have been more diverse since, and our latest review of house prices is a picture with dramatic chiaroscuro. A brightening outlook for America stands out against the darkening tones of the beleaguered economies on the periphery of the euro area.”

But is the picture in America as bright as the Economist suggests? President Obama’s recent State of the Union address reveals anxiety over the pace of the housing recovery while advocating relaxation of credit restrictions on mortgage lending. Haven’t we been here before? When there are insufficient credit worthy (prime) buyers available to take up mortgage offers, who are the banks looking to lend to? No, surely not sub-prime mortgages again? The US Federal Reserve has been using Quantitative Easing (printing money) to buy up the last round of toxic sub-prime debt giving the banks a “free ride” but this tax-payer funded largesse is clearly not enough.

“Thirty large American corporations spent more money on lobbying than they paid in federal taxes from 2008 to 2010, according to a report from the nonpartisan reform group Public Campaign.”

Meanwhile Europe and Japan remain in the economic doldrums as reported by Investment Week:

“According to initial estimates, German GDP fell 0.6% in the fourth quarter of 2012; the biggest drop since the fourth quarter of 2008. French Q4 GDP, meanwhile, fell by 0.3%.

Slumping export numbers contributed to the poor numbers, which were both worse than forecast.

Italian growth figures were also worse than expected as the economy posted its sixth successive quarter of contraction with a 0.9% drop. Economists had expected a 0.6% fall.

Those numbers dragged eurozone GDP down to a 0.6% contraction in Q4, its worst performance in almost four years.That followed earlier news of a Q4 growth figure for Japan that confounded expectations of a 0.4% rise.

Japanese GDP dropped by 0.1% on the quarter, a figure which may bolster its advocacy of stimulus policies which have produced a significant weakening in the yen in recent months.”

The UK picture is similarly bleak yet stockmarkets around the world are booming. There is one driving factor – weight of money. The combination of diminishing returns from bond (fixed interest) markets and massive injections of printed money from central banks is fuelling the boom in share prices of banks and corporations. But sooner or later, the realisation will dawn that there is no economic growth to create shareholder profits. Consumers (people) are suffering reducing incomes which means they have less to spend on “things”. Who is going to buy the goods and services these banks and corporations provide? Countries are competitively driving down the relative value of their currencies in an attempt to boost exports – a zero sum game unless one or more countries are prepared to let the value of their currency rise.

There is no salvation within the current economic paradigm and we need a radically different economy if we are to avoid civil unrest and global conflict (WWIII).